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December 16, 2003

Stock transfer tax would hurt Wall Street

A new study by scholars from New York University and Stanford University concluded that a stock transfer tax would make shares traded on the New York Stock Exchange (NYSE) less liquid while substantially slashing trading volume and it said such a tax would make other trading markets more important at the expense of the New York market, shrink New York Stock Exchange listings, drive down New York’s overall market quality, and increase market-wide volatility of stock prices.

Yakov Amihud, from New York University, and Haim Mendelson, from Stanford University, evaluated the effects of a proposed stock transaction tax on stock liquidity, price discovery and informational efficiency.

“A small rise in transaction costs on the NYSE will make the NYSE a worse choice compared to its competitors and will divert trading into other markets,” the paper said.

One of the key functions of a securities market is to provide liquidity, according to the paper.

“That is, a securities market should enable traders to buy and sell the traded instruments quickly and at low cost.”

The paper demonstrated that low transaction costs contribute to higher trading volumes. But a small tax could lead to a decrease in volume of up to 11 percent in one day and would result in a greater volume loss in the future, according to the paper.

“A fixed per-share tax that hurts the NYSE today will have devastating effects going into the future,” the paper said.

The tax would also affect stock prices, according to the paper.

“Increasing trading costs on stock makes investors demand higher yield on the stocks,” the paper said.

“This makes companies’ cost of equity capital rise and their stock prices fall. Or, lower stock trading volume, which is the predictable result of higher trading costs, is associated with higher cost of capital and lower stock prices,” the paper said.

The tax would also have a negative effect on stock listing decisions, the paper reported. The NYSE currently has a high level of liquidity which is translated into a higher stock value, according to the paper.

“Clearly, a tax will erode the advantages of the NYSE, and will make firms less likely to list on the NYSE.”

The paper warned that the NYSE could eventually lose its status as the leading stock market in the world if the tax were enacted.

The union-based Working Families’ Party and other tax-and-spend pressure groups that want dramatic increases in state spending are pushing this short-sighted tax on stocks that trade in New York State.